As he made his way into the Marriott Crystal Gateway Hotel in Arlington, Virginia, early on Monday, he carried with him notes for a speech that would boost the Dow and the NASDAQ by almost 1.2 per cent, send global markets soaring, create a sharp fall in the US dollar, put a rocket under gold and copper prices, and provide the kind of economic hope that an incumbent president needs in an election year.

But Bernanke was not intentionally pandering to those who play the markets. His speech, which committed the Fed to leaving interest rates “low for long", was focused squarely on lifting the spectre of unemployment from the shoulders of US workers.

With an official interest rate of 0.25 per cent, the US has enjoyed three consecutive months of strong jobs growth, adding 750,000 jobs in that time. US unemployment has remained high, at 8.3 per cent, only because with the sniff of recovery in the air, workers are flooding back into the job market and boosting the participation rate.

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But Bernanke is not satisfied.

“The job market remains far from normal," he said on Monday. He was especially concerned, he revealed, about the number of Americans who had not worked for over six months.

“Because of its negative effects on workers’ skills and attachment to the labour force, long-term unemployment may ultimately reduce the productive capacity of our economy," he warned.

Jobs growth would come with a boost to demand, Bernanke said, and the preferred tool for that was a low exchange rate.

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As Bernanke sat down US markets were set to enjoy a one-day rally the likes of which they had seen only rarely this year, with a domino effect on markets around the world. Not least Australia, where the S&P/ASX 200 Index rallied by 38.5 points to 4301.3 points on Tuesday.

Bank of America Merrill Lynch chief economist
Saul Eslake
said Australia stood to gain even though America barely featured these days as an export market.

“Good news out of the US and or Europe boosts confidence here. If it’s sustained it boosts spending as well. There’s also no doubt that our financial markets are much more closely correlated with the financial markets of US and Europe than they are with Asian financial markets," he said.

Markets interpreted Bernanke’s speech as not just a commitment to avoid interest rate rises, but as a hint that the Fed was open to more quantitative easing, the process by which it buys up bonds to pump money into the economy.

The first two rounds of QE began in 2008 and 2010, underpinning asset prices by pumping hundreds of billions of US dollars into the global economy.

In 2009, Bernanke claimed a year of easy money had “helped to support employment and incomes during the first year of the crisis".

But the merits of QE are now viewed sceptically by some.

“Quantitative easing does more for asset prices than it does for economic growth and employment but it is more likely to have a positive effect than similar policies would in Australia," Eslake says.

Several central bankers have recently expressed their doubts about the risks engendered by leaving monetary policy in a relaxed setting for too long.

Bank of International Settlements general manager Jaime Caruana last week publicly warned of the costs of loose monetary policy, especially in terms of banks’ expanding balance sheets.

Bank of Japan governor Masaaki Shirakawa said loose monetary policy could create new bubbles and impinge on productivity as economies moved out of recovery.

“If low interest rates induce investment projects that are only profitable at such interest rate levels, this could have an adverse impact on productivity and growth potential of the economy by making resource allocation inefficient," he said.

The Australian economy can see an indirect boost from anything that strengthens the foundations of the US economy.

Former Westpac chief economist and University of NSW associate head of economics Nigel Stapledon says Australian asset prices are more of a focus for the central bank. “It slashed interest rates in 2008, going into 2009. It never said so but I suspect it was a little bit perturbed by . . . the fact that house prices when they were tanking in the US jumped 15 per cent or thereabouts in Australia," he says.

“The Reserve Bank of Australia probably isn’t going to do too much to help if people squeal about small falls in house prices."

While interest rates remain relatively stable, the Australian dollar holds its strength and trade-exposed sectors suffer.

But there is hope that a resurgent America can provide the fuel for a global recovery that will boost Australian confidence and wealth, so the RBA can move back to presiding over falling unemployment and focus on fighting inflation.

But even if that does not happen, the RBA is in a privileged position.

With the official cash rate at 4.25 per cent, it still has significant scope to cut.

The Fed does not have that luxury. Its rate is 0.25 per cent and can’t be cut below zero.

Perhaps because of the different prevailing conditions, RBA governor
Glenn Stevens
takes a markedly different approach to Bernanke.

The RBA has said it will need to see a material deterioration in demand before it cuts rates. Insiders interpret that as meaning the bank will maintain its resolve even if the unemployment rate creeps up from its current level of 5.2 per cent.

JP Morgan, in an economic note released last week, cautioned against economic hubris.

It calls Australia’s growth “mediocre", noting that the average annual economic growth since mid-2009 of 2.4 per cent is lower than the US (2.5 per cent), Canada (2.9 per cent) and Germany (3.0 per cent).

Business leaders crave the relief a rate cut would bring.
Solomon Lew
has publicly called for a rate cut of between 0.5 and 0.75 per cent at the next board meeting.

The exchange rate, which was at $1.05 late yesterday, has been a drag on Australian growth.

Cutting interest rates would decrease the attraction for foreign investors in Australia, and thereby lead to a lower dollar.

Westpac Banking Corp predicts that the RBA, tempted by the idea of giving the east-coast economies a break, will cut its interest rates.

Westpac predicts the cash rate will fall to 4 per cent by June, and to 3.75 per cent by September, before holding steady.